The Loser’s Curse: Overconfidence vs. Market Efficiency in the NFL Draft
The NFL draft is a great example of what Malcolm Gladwell calls the mismatch problem (when the criteria for evaluating job candidates is out of step with the reality of the job demands.) Mismatch problems exist because we desire certainty (bias from over-influence from precision and models).
A question of increasing interest to researchers in a variety of fields is whether the biases found in judgment and decision making research remain present in contexts in which experienced participants face strong economic incentives.
To investigate this question, we analyze the decision making of National Football League teams during their annual player draft. This is a domain in which monetary stakes are exceedingly high and the opportunities for learning are rich. It is also a domain in which multiple psychological factors suggest teams may overvalue the chance to pick early in the draft… Using archival data on draft-day trades, player performance and compensation, we compare the market value of draft picks with the surplus value to teams provided by the drafted players.
We find that top draft picks are overvalued in a manner that is inconsistent with rational expectations and efficient markets and consistent with psychological research. (PDF)
When the first pick isn’t the best pick.
Malcolm Gladwell on Hiring and mismatch problem in sports.